It’s not only in India that the HSBC Manufacturing Purchasing Managers’ Index (PMI) weakened in May. Manufacturing weakened during the month in most of Asia apart from Japan, where shock-and-awe monetary easing seems to have had some positive effect.
That’s not much of a consolation for India though, where the manufacturing PMI was at 50.1 in May, a jot above 50, a reading below which signals a contraction from the previous month. The Chinese, Vietnamese and Taiwanese manufacturing sectors also contracted during May. Besides nervousness about the US Federal Reserve’s bond-buying programme tapering off, there seems to be a more fundamental reason for the underperformance in the Asian markets.
In India too, the sub-index for output was at 48.6, which means it contracted during the month. The PMI survey for May clearly indicates what’s wrong with manufacturing in the country. Firms said market conditions are tough, with several complaining of increased competition. Firms have lost pricing power, seen from the output price sub-index slipping below 50, indicating that prices in May were lower than in April.
Although demand has been affected, there are signs that manufacturers are unable to meet even that because of power and water shortages, and strikes. That is seen from the increase in suppliers’ delivery times, the rise in work backlog and in lower output. The rate of increase in new orders was marginal. The silver lining is that export orders did well, perhaps due to the weaker rupee. The decline in output prices indicates that core inflation will fall further, providing justification for the Reserve Bank of India to cut rates again.
That said, as Nomura economists Sonal Varma and Aman Mohunta point out, the manufacturing PMI has averaged 50.6 in April and May, well below the average of 53.1 in the March quarter and dashing hopes of a recovery.